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When Memories Fail, So Do Investments

When history fades, long-term returns can seriously suffer.

Hurricane Isaac drummed up memories of Hurricane Katrina as it headed toward landfall, but fortunately it failed to wreak the same horrifying havoc on the Gulf Coast. However, Hurricane Isaac has also stirred up another memory: the Deepwater Horizon disaster and subsequent Gulf oil spill.

The extreme weather event delivered ominous indications that BP(NYSE: BP) didn't execute the level of clean-up it should have. Tar balls and oil that had been hiding out deep below the surface have been washing up on Gulf Coast beaches once again, and tests have shown they're from that spill.

What Isaac revealedBP's management probably hopes nobody's noticed. In fact, the energy giant's stock price hasn't reacted all that strongly since the news about oil showing up on Alabama and Louisiana beaches was reported earlier this week.

It's a frustrating turn of events, but it goes to show that once media uproars and public relations campaigns are over, true disasters may have long ripple effects that will continue to drag on companies -- and their profits, when they are appropriately held accountable -- for years to come.

Those who assumed BP must be "cheap" right after the disaster and snapped up shares might want to ponder whether it's wise to keep the shares. This week, the Justice Department officially charged BP with gross negligence and condemned its "culture of corporate recklessness." BP could face up to $21 billion in fines, not to mention potential expenses related to litigation and damage compensation.

In other words, the possible ramifications to BP and its financial condition are not even nearly behind it yet, just like the ramifications of the spill aren't fully known yet.

This is serious risky business, but I'm betting BP's management and speculative investors would rather everyone just forget all over again.

Reckless endangermentMany, many investors allowed themselves to forget incidents like ExxonMobil's (NYSE: XOM) historic Exxon Valdez disaster, too. Heck, ExxonMobil's a well-oiled profit-generating machine and a dividend payer to boot. Who cares about that old stuff?

Regardless, ExxonMobil joins BP in what some might call reckless disregard. In a sobering look at climate change and its surrounding complex issues, Rolling Stone contributor Bill McKibben recently proclaimed, "there's not a more reckless man on the planet" than ExxonMobil's CEO Rex Tillerson. Tillerson recently admitted that global warming does exist (not a news flash to many people, of course, but a surprising admission from a heavyweight in the fossil-fuel industry) and dubbed it an "engineering problem" with "engineering solutions."

McKibben mentions the government's gift of what is basically a "special pollution break" as fossil fuel concerns are basically allowed their dump their waste (carbon dioxide) for no charge. This certainly wouldn't fly for any company where people could see the waste piling up with the naked eye.

In economics, such phenomena are known as "negative externalities": costs are spread, sometimes subtly, to everyone but the corporations that created the problems. These aren't good for the marketplace; in fact, they distort it.

As climate-related disasters worsen over the years and energy companies' profitability and reputations are curtailed, will anyone summon the memory to remind Tillerson about those "engineering solutions" he spoke of? The sad part is it will probably be too late. And of course, given the inevitability that more accountability will be required of companies, shareholders will rue the day they condoned corrupted, unsustainable business models with their investment dollars.

Look up the recordIn America, investing isn't the only area that sorely needs more long-term views. Reckless companies might think a lot differently about their actions if more consumers realized the true price of reckless consumption.

In the aforementioned examples, if more people adopted the hybrid and electric vehicles being developed and sold by companies like Ford(NYSE: F), Toyota(NYSE: TM), and techie upstart Tesla(Nasdaq: TSLA), companies like BP and ExxonMobil would quickly rethink some of their business strategies.

Ford, Toyota, and other rivals are certainly reacting to various pressures with their products, but Tesla's Elon Musk has been emphatically clear about one major reason his company exists: "moving us off [expletive] oil as fast as possible."

Still, shareholders are a major part of the equation, and we should welcome corporate accountability instead of deploring it as a profit drain.

Investors too rarely see stocks as more than ticker symbols and numbers. They're complex organisms with stories and histories, not to mention entire departments devoted to the psychological business of helping people forget bad stuff and see the good stuff.

But such forgetfulness is kind of like meeting an imprisoned serial killer and thinking that since he's behaving well he must be fine now -- conveniently forgetting about those dozens of people he murdered in the '80s and the fact that plenty of psychopaths hide their illness very well.

Trouble will probably crop up again if there's no real remedy except for the shoddy Band-Aids of time, forgetfulness, and PR campaigns. As your mom might say, "Look up the record" -- and adjust your investing accordingly.

Author

Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax